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Abstract
This study examines the performance of pragmatic ETF-only investment strategies published either in an investment newsletter, blog, or are otherwise available through investment advisories. Our objective is to determine if ETF-only strategies can outperform either the S&P 500 or more representative benchmarks on an absolute and/or risk-adjusted basis. We surveyed a number of strategies and analyzed a subset that supported a five-year price history, including both trading commissions and bid-ask spread costs. Our findings show that while a majority of strategies beat the S&P 500 and a representative benchmark, weak statistical outperformance persisted in a smaller fraction of the sample. © 2011 Academy of Financial Services. All rights reserved.
JEL classification: G11; G14
Keywords: Active management; Market efficiency; Outperformance; Exchange traded funds
1. Introduction
In a survey of investment professionals, conducted in March 2008, 67% called ETFs the most innovative investment vehicle of the last two decades and 60% reported that ETFs have fundamentally changed the way they construct investment portfolios (Knowledge® Wharton; Anonymous, 2008). Surveys within Europe corroborate this growing trend (Amene et al., 2009). While there are vast amounts of information on ETFs and their individual performance, there has been limited analysis on the investment performance of pragmatic ETFonly investment strategies. One recent study that demonstrated abnormal returns at a 0.01 level of statistical significance was conducted recently by De Jong and Rhee (2008), who examined ETF-only strategies using both momentum and contrarian methods. Chang and Krueger (2010) found that ETFs appear to have performed worse than their pure index fund counterpart with lower returns, higher risks, and lower risk-adjusted returns. Grossman and Beach (2010) found that ETFs were inferior to both underlying assets and ADRs in international diversification for U.S. investors while Chu et al., (2007) found that cross autocorrelations patterns of 17 index international iShares ETFs were marginally exploitable with cautious execution. Cubes were found by Curcio et al. (2004) to be favorable to long-term investors.
This paper assesses a broader array of strategies to infer more about the population performance of ETF-only strategies available to financial planners and individual investors. The objective is to determine if ETF-only strategies can typically outperform a representative benchmark on an absolute and/or risk-adjusted basis. If this is the case, it calls...